Trade Conflict and Developing Asia

The growing trade battle that broke out in early 2018 between the United States and the People’s Republic of China (PRC) means GDP could fall by as much as 1 percentage point in PRC and 0.2 percentage point in the United States over a period of 2-3 years relative to a no-conflict scenario, according to a new ADB working paper The Impact of Trade Conflict on Developing Asia. The study looks at three scenarios: current; a bilateral escalation; and the so-called worse-case. The current scenario describes the series of tariffs in place as of December 2019 before the temporary truce and assumes tariff rates will escalate from 10% to 25% in 2019. The bilateral escalation scenario assumes 25% tariff rates on all US imports from PRC and all PRC imports from US. The worse-case scenario adds to this second scenario a 25% tariff on US imports of autos and auto parts and a tit-for-tat 25% retaliatory tariff from affected economies. The larger impact on the PRC is because tariffs imposed by Washington on Beijing are an order of magnitude larger than the PRC’s retaliatory measures. In addition, the PRC is more dependent on US demand for its goods.

What started as a bilateral trade clash rapidly became global: these two giant economies generate two-fifths of world GDP and around a quarter of international trade. The report warns that other advanced economies such as the EU and Japan will suffer if the conflict escalates. Evidence of collateral damage to other Asian economies is emerging, even as exports from the region remain strong. Investors and stock markets are increasingly concerned; and the IMF has said the conflict will make the world poorer.

The study not only examines the direct impact of the conflict on all tariff-affected goods, but also estimates the indirect effect of tariffs on GDP, exports and employment. Data show the impact globally, regionally and on individual countries. The negative impact of the trade war on the PRC cuts across many sectors. In the worst case scenario, the PRC electronics industry would be hardest hit by 0.15 percentage point of GDP. Other affected sectors in the PRC include wholesale trade, mining, agriculture, textiles, financial services and chemicals.

One positive outcome from the clash is that trade redirection could benefit some Southeast Asian industries that compete directly with the PRC, such as electronics and textiles. The ASEAN-5 countries could potentially gain in both these sectors if this redirection takes place, although they also lose in the short term as supply chains are affected. Trade and production redirection is likely to occur slowly if it happens.

The effect on global employment under the current scenario is negative, given weaker global GDP and lower trade. The initial wave of trade measures could result in a loss of 3.5 million jobs in the PRC and around 180,000 in the US. Escalation, if it materialized, could result in job losses of 8.5 million in the PRC (about 1% of total employment in 2017) and significant job losses in developed economies such as the EU and Japan. Trade redirection means there could be slight employment gains in developing Asia outside the PRC.

The US-PRC trade conflict is focusing Asian policymakers on developing ways of cushioning their economies from its effects. The report gives the example of expansionary fiscal policies and the lowering of the reserve requirement by the central bank the PRC. The objective is to boost credit to counteract some of the negative impacts outlined above.

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